3 Top Short Ideas – Investing With The Gurus

Short-selling, the act of buying a stock high and betting that its price will take a dive in the future, isn’t every investor’s cup of tea. However, for those that have the stomach for it, investment Guru Andrew Left of Citron Research might be an inspiration. While short-investing isn’t necessarily something that novice investors should bet big on, it does have a place in one’s portfolio – but only if you are comfortable with the strategy. It could be considered a “hedge” to some of your long positions.

Philosophy

Andrew Left has been in the investing/trading business for over 17 years, and he has been courted by industry media such as CNBC, Fortune Magazine, Forbes, Barron’s, the Wall Street Journal…and many others. So, rather than being someone on the fringes, Mr. Left is very much a mainstream investment Guru who thinks and acts differently from other Gurus we’ve covered in the past.

Citron has a philosophy that’s data-driven in its conclusions and recommendations. As we’ll see below, all of its conclusions are based on industry-wide and company fundamental research, with most of the information used to draw those conclusions publicly available.

As for Mr. Left’s track record? Over 50 of the target companies featured in the Research Reports published by Mr. Left have (directly or indirectly) been subject to regulatory interventions from State or Federal authorities.

Left also encourages readers of his reports to use their own research to validate or debunk his conclusions. Still, this Guru is the first to admit that “not all” of the shorts have necessarily worked – though the vast majority of them have!

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The Shorts

If you wish to follow this Guru and try your hand at shorting, then here are three stocks for you to consider:

1) Netflix, Inc. (NFLX)

One price target estimate that Citron has put out on NFLX indicates that the stock could fall as low as $340. Some of the “headwinds” attributed for the stock price going lower than it trades today include:

  • The Justice Department’s approval of the Time Warner/AT&T merger
  • The proposed merger talks between Disney and Comcast
  • Apple’s huge investment in potential streaming services (as indicated by AAPL’s poaching of Netflix executives)
  • YouTube’s (Google’s) overtures at getting into the original content creation business
  • The cloud that the debate over Net Neutrality has cast over who pays how much and to whom

Even if some of these events come to fruition, it’s sure to drive the price of NFLX lower.

2) Inogen, Inc. (INGN)

According to Citron’s Guru Left, this medical technology company, which delivers devices and technologies around portable oxygen therapy, is poised to take a deep dive – without oxygen to support it! Left and his team predicted that the stock price could take a steep haircut – as much as 50% lower.

Some of the arguments behind this predicted dive include:

  • Peer-group analysis, which shows INGN trading (intra-day Jun 10) at PE Ratio (TTM) of 171.23X, while competitors with comparatively stronger fundamentals trade at significantly lower valuations – Medtronics plc (MDT) 38.45X, Koninklijke Philips N.V. (PHG) 22.81x
  • Less stringent regulatory hurdles make for extremely low barriers for competitors to enter into the business that INGN operates in
  • Insignificant R&D investment (only 2% of revenue) compared to industry average of 6% (Medtronics 7%, Philips 10%)
  • Uncomfortably large amount of insider selling activity on the stock

Given these negative headwinds, it might be understandable to see why Guru Left is short this stock.

3) Wayfair Inc. (W)

E-commerce is typically supposed to be a good place to invest in – but the Citron Guru has no love lost for W. While the stock trades at about $126 as of July 20th, Guru Left sees it falling to less than $30 by the end of 2018. And here’s why:

  • Since going public on Oct 2, 2014, the company has reported losses for four consecutive years, starting at -$150M (Dec 2014), and ending at -$244.6M (Dec 2017)
  • Given this loss-making track record, investors continue to pile up on the stock. Since it’s IPO at $29, the stock has risen 316% – to $120.66 (intra-day Jul 10). That in and of-itself should signal red flag to investors
  • Facebook is one of the primary ad partners for W. With the popular social media company coming under increasing regulatory scrutiny, it is likely that some of its woes will likely rub off on W
  • While it is already suffering cost pressures, the recent Whitehouse bill allowing States to collect sales tax from eCommerce sites will only add to that pressure
  • Both Amazon (AMZN) and Walmart (WMT) are targeting expansion of eCommerce. This means that much weaker players in the niche, like W and Overstock.com, Inc. (OSTK), are very likely to become collateral damage when these giants fight for market share

Clearly, if these factors come to pass, W is just a bubble waiting to burst. An ideal stock for investors that believe in this thesis to short.

Shoriting Stocks is an interesting investment but these MUST BUY Stocks are set to soar
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Author does not have investment in stock discussed in this article.

Also Read: Investing Like the Gurus – Understanding Bill Ackman’s Investment Style

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